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The Central government on Wednesday set a payment default of 10 lakh as the trigger for bankruptcy proceedings of small businesses under the new simplified scheme called pre-packs.

The finance ministry said in a tweet that this would be the minimum threshold of payment default for micro, small and medium enterprises (MSMEs) under the pre-pack scheme.

“Pre-pack for MSMEs is a hybrid corporate rescue process, which blends elements and virtues of both formal and informal insolvency proceedings. A resolution plan is negotiated between the debtor and its creditors before commencement of formal proceedings," the ministry said in a series of tweets.

This threshold of payment default is much lower than the 1 crore threshold otherwise applicable under the Insolvency and Bankruptcy Code (IBC) for initiating bankruptcy proceedings in the case of non-MSME businesses.

In the case of large companies, if the payment default criteria is met, even one lender could initiate proceedings against the defaulter. However, in the case of MSMEs, the process can be started only by creditors accounting for 66% of the business’ debt. A voluntary initiation of pre-pack scheme would need 75% shareholder approval backed by creditors representing 66% of debt.

The government brought an amendment to IBC by way of an Ordinance on Monday to offer an alternative turnaround opportunity for small businesses facing stress due to the economic downturn caused by the pandemic. The scheme takes into account the special circumstances in which MSMEs function.

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